The 2025 return is filed. For many extension filers, that means the number the IRS will use to judge your 2026 estimated payments is finally known. The payments you made in April, June, and September were most likely based on a guess.
Tax compliance is not a once-a-year event. Estimated tax runs on its own calendar, separate from the filing deadline, and the IRS measures each payment against a required amount on each due date. The last 2026 payment is due January 15, 2027, and it is the last chance to correct the year’s estimates before the account is graded. IRS Form 1040-ES. [irs]
Why the Filed Return Changes the Math
The safe harbor rules protect you from the underpayment penalty if your withholding and timely estimates reach the smaller of two targets. One is 90 percent of your 2026 tax. The other is 100 percent of the tax shown on your 2025 return, or 110 percent if your 2025 adjusted gross income was more than $150,000. IRS Publication 505. [irs]
The second target depends on a return that, for an extension filer, did not exist when the first payment was due. Many taxpayers set their April payment from last year’s figure or a rough projection and never revisited it. Now the actual 2025 tax is on file, and the prior year target is a fixed number rather than an estimate.
Think of it like a test where the answer key arrives halfway through the term. You cannot change the answers you already turned in, but you can still make sure the last one is right before the bell rings.
Tax problems are easier to manage before the IRS process controls the timeline. If you want a practical review of your 2026 estimates against the return you just filed, speak with Steve Perry, EA. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
The Misconception About Catching Up
Many taxpayers believe a large January payment wipes the slate clean. It does not. The penalty is figured separately for each installment due date, so an underpayment in April keeps accruing until it is covered, even if the year ends fully paid or with a refund. Instructions for Form 2210. [irs]
The cost is interest based. The IRS underpayment rate is 7 percent for the fourth quarter of 2026, and that same rate applies to estimated tax underpayments. IRS quarterly interest rates. [irs]
The January payment still matters. It stops the meter on earlier shortfalls and keeps the fourth installment from creating a new one.
A Worked Example With an Equipment Purchase
Consider a business owner whose 2025 return, filed in October, shows total tax of $96,000 and adjusted gross income above $150,000. The prior year target is 110 percent of $96,000, or $105,600, which works out to $26,400 per quarter.
Back in April, the owner estimated $80,000 of 2025 tax and paid $22,000 each quarter. Through September, that is $66,000 paid against $79,200 required, a $4,400 shortfall on each of the first three installments.
Under the prior year approach, a January payment of $39,600 brings the total to $105,600. The earlier shortfalls still carry a modest penalty, but the account is protected from that point forward.
Now add a planning decision. The owner is considering a $150,000 equipment purchase. Under current law, the full cost of qualified equipment can generally be deducted in the year it is placed in service. If the equipment is delivered and ready for use by December 31, 2026, the owner’s projected 2026 tax may fall to roughly $70,000. Ninety percent of that is $63,000, which is less than the $66,000 already paid. In that case, the January payment may not be needed at all to meet the safe harbor. IRS Notice 2026-11 announcement. [irs]
The tradeoff is certainty. The prior year target is locked in. The current year target is a projection, and it holds only if the equipment is placed in service on time, the records support the deduction, and income does not rise in December. If any of those change, the lower target moves.
Before assuming your estimates are settled for the year, consider having Steve Perry, EA evaluate which target fits your records, your planning decisions, and your IRS risk. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
Options That Expire on Schedule
Several tools are available only before certain dates:
- Increasing wage withholding before December 31, since withholding is generally treated as paid evenly through the year and can cover earlier shortfalls
- Making the January 15, 2027 payment, which limits further penalty growth
- Filing the 2026 return by February 1, 2027 and paying the full balance, which removes the need for the January payment
- Using the annualized income method on Form 2210 when income arrived late in the year
- Placing planned equipment in service by December 31 if the current year target is part of the plan
There may be other options depending on the facts and circumstances.
Where Records Decide the Outcome
The IRS credits estimated payments to your account by tax year and Social Security number. A payment applied to the wrong year, made under the wrong spouse, or confused with an overpayment carried forward from 2025 can make a fully paid account look short. Checking your IRS online account against your own payment records before January is far easier than sorting it out after a penalty notice arrives.
If IRS notices, unpaid balances, missing payment records, or planning gaps are starting to create concern, speak with Steve Perry, EA before the problem becomes harder to control. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
Estimates Are a Year Round Process
Estimated tax is not a filing task. It is a running measurement the IRS takes four times a year. Many penalties do not come from a filing mistake. They come from what happens after the return is filed, when the new prior year figure is known and the estimates are never adjusted to match.
Good tax outcomes come from managing the year before the IRS forces the issue. For help recalculating your January payment and choosing the right safe harbor while every option is still open, speak with Steve Perry, EA. Call 678-717-9818, email steve@bookstaxesatl.com, or connect on LinkedIn at www.linkedin.com/in/steveperrybtm.
Frequently Asked Questions
Does my October filed return change what I owe for January 15?
It can. The prior year safe harbor is based on the tax shown on your 2025 return, so the actual figure may require a larger or smaller final payment than your original estimate.
Will a large January payment erase penalties from earlier quarters?
No. Each installment is measured on its own due date. A January payment stops further growth but does not reach back to cancel earlier shortfalls.
Can I skip the January payment?
Yes, if you file your 2026 return by February 1, 2027 and pay the full balance, or if your payments already meet the safe harbor.
Which safe harbor is safer?
The prior year target is fixed and known. The current year target may be lower, but it depends on a projection that must hold through December 31.
What if I receive an underpayment penalty notice?
Contact Steve Perry at Books, Taxes & More to address the situation. He will compare your records and the IRS records and provide a recommended course of action. Misapplied payments and the annualized method can sometimes reduce or eliminate the penalty.
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